Okay, back here. And, I've confrimed now the problem. Note that this is BEFORE trying 1.2 - I will try if you've fixed that and comment on that too, but I think it might be valuable to tell this with the 1.1 experience too, in case you've not fixed the correct thing:
As I started my playing this game in the very start of all, I did this: I went to options before anything else, as with every game. I clicked on invert mouse and subtitles if they weren't already. I go in, problems happen in level 2+
Today, I tried to fiddle with the subtitles thing as you asked, to see if that tab vanishes or reappears. It doesn't. Every time I try, enterin gthe level with it on, it off, clicking it off or on in the level etc. it's the same in the menu.
Then, I finally tried something I hadn't even tried to before, of which I apologize. I turned invert mouse off and went to levels 2+
And the dialogues work, so does Twilight's grunting, and now that shadow ball even has eyes! It DID NOT have eyes before, and I didn't even know it was supposed to have
I tried with subtitles off or on. Doesn't matter.
If invert mouse is on, levels 2+ do not work at least with whatever combination of hardware I and that guy had.
It makes me laugh a bit that the reason no one else in this thread said anything is probably that no one else in this thread grew up on flight simulators and space opera fighters where you move as a plane does, nose pointing up as you pull down. Because of that I cannot use a mouse even in 3d-games except inverted
So, it would be fun if the invert mouse can be made to work. I will now try 1.2